Insurance for your foreclosure fixer-upper

In today's market, paying cash for an empty, foreclosed house that you plan to live in isn't a bad idea. There are thousands of very cheap foreclosure homes out there, and it's a way to maybe buy more house than you otherwise could afford. But will you be able to get home insurance to protect your investment?

These vacant homes may need a ton of work. Horror stories abound about angry former owners who pour cement down the toilets before they move out, scavengers who rip out appliances and copper wiring, and vandals who break windows and spray-paint walls.

It's all fixable, of course. And as you work to make your new home livable, you'll want it covered by insurance. However, insuring a vacant, vulnerable foreclosure is far different from buying a standard homeowners policy for a move-in-ready home. Here are a few things to know before you shop for coverage.

Finding insurance may take some work. Insurance is available, but it's far from typical. You may not get the same levels of coverage you would from a standard homeowners insurance policy. And not all insurers cover homes without owners living in them. So you may have to shop around for specialty insurers or carriers licensed outside your state.

You'll need to have the home inspected. "If the deal is something you can't pass up, the first step is to have a thorough home inspection by a qualified inspector before you seal the deal, so you know exactly what you are buying and how much more (the repairs are) likely to cost you," says Lynne McChristian, Florida representative for the Insurance Information Institute.

Insurers will want to see inspection results to gauge how much work is needed, how much money you're likely to put into the project and how much longer the house is likely to sit vacant.

The longer a house is empty, the higher the risk -- and the rates. The amount of time a house remains unoccupied is a key insurance issue.

"Homes that have been left vacant, unattended and not maintained for long periods of time deteriorate much more quickly than homes that have been occupied and heated and cooled," says Candace Bunker, spokeswoman for Citizens Property Insurance Corp. in Tallahassee, Fla. "Many of these homes require extensive renovations just to make them habitable."

Daren Blomquist, vice president at foreclosure-tracking firm RealtyTrac in Irvine, Calif., says foreclosures easily can sit vacant for six months. The national average is 195 days.

Blomquist adds that with many vacant homes, no one is paying attention to maintenance, which is a concern for older homes in particular. In markets such as Chicago, Detroit and Cleveland, many foreclosed homes were built before 1980. "The older the home is, the more likely it is to have problems just by virtue of being older," he says.

As a foreclosure property is transformed into a home fit to live in, home insurance experts say you're likely to find three coverage options.

"Builder's risk" is coverage you buy to protect new construction or renovation and remodeling while you are not living in the house, says John Watt, a vice president at Innovative Risk Solutions, a specialty insurance agency in Fort Lauderdale, Fla.

Such a policy typically costs less at the beginning of the project and then becomes increasingly expensive as the construction and loss risk increase, says Tom Terfinko, an assistant director with the Florida Surplus Lines Service Office, a state insurance regulatory agency in Tallahassee.

Vacant dwelling policies insure an unoccupied home for most physical losses except floods or earthquakes, says Watt. There's one other catch: These policies generally will cover vandalism but not theft. And theft is a huge problem with vacant homes.

"A thousand dollars of copper wiring and piping could cost $20,000 to replace," Watt says. "We recommend that you don't put in the appliances and central air conditioning until you're ready to move in."

HO-8 is the technical name for a special insurance policy designed for older homes. It provides more limited coverage for those properties. This insurance would work for a foreclosure if the damage isn't too severe and you're able to live in the home while you make repairs.

But if the foreclosure house is in decent enough shape that you'll be able to move in within 30 days of closing on the purchase, you should have no trouble getting a conventional home insurance policy with more extensive coverage, says Bunker.